Wealthy learn harsh lesson in Hong Kong

The global financial crisis rammed home the importance of risk allocation and the dangers of leverage to investors the world over. In Asia-Pacific, the lessons were perhaps harshest in Hong Kong.

Despite recording the world’s fastest rebound in terms of high-net-worth population and wealth levels last year, Hong Kong stands out in the region for being furthest behind its peak 2007 asset level.

The city saw the number of high-net-worth individuals (HNWIs) with at least $1 million in financial assets rise 104% year-on-year in 2009 to 76,000, while their wealth rose 109% to $379 billion. This compares to 2007 levels when there were 96,000 HNWIs in the city with $523 billion in wealth.

By comparison, HNWIs in China, Japan, India, South Korea, Taiwan and Thailand all  exceeded their 2007 wealth levels to varying degrees by the end of last year, while Australia, Singapore and Indonesia had only marginal shortfalls.

“Going into the crisis, a typical Hong Kong investor was probably more leveraged than peers in other [Asian] markets, largely because financial markets in Hong Kong are more developed and sophisticated and have a broader array of products for people to choose from,” says Wilson So, interim head of global wealth management for Merrill Lynch in Asia-Pacific.

“Investors in Hong Kong were more willing to take risk. There is a high degree of understanding of more complex products [among HNWIs in Hong Kong]. But when you have a leveraged portfolio, returns are going to be more pronounced either up or down. I think they have had to learn a more painful lesson.”

So notes that Hong Kong’s wealthy investors have since become more cautious and conservative, suggesting lessons have been learned. “They have definitely become more thoughtful. Now they want to know the details of each product and want to shy away from highly geared investments.”

He was speaking to AsianInvestor in Hong Kong yesterday at the presentation of the Asia-Pacific Wealth Report 2010, published jointly by Merrill Lynch Wealth Management and consultancy Capgemini.

The report showed that in 2009, Asia-Pacific HNWIs increased their allocation to equities and real estate by four percentage points to 27% and 26%, respectively, and funded it by reducing cash holdings from 29% in 2008 to 22% last year. They held just 20% in fixed income, which was static from 2008.

Comparatively, HNWIs globally increased allocation to equities by four percentage points to 29% last year, and held a more substantial 31% in fixed income, but had just 17% in cash and 18% in real estate.

The researchers forecast that Asia-Pacific and global HNWIs will increase allocations to equities to 31% and 35%, respectively, by 2011. But they expect Asia’s wealthy to increase positions in fixed income by five percentage points to 25%, while global HNWIs will reduce their fixed income allocation to 30%.

Separately, Asia-Pacific HNWIs decreased investments in their home region by three percentage points to a still dominant 64% in 2009, increasing their allocation by two points to North America (19%) and by three points to Latin America (6%).

Allocations from Asia-Pacific HNWIs to Latin America are expected to reach 9% by 2011. But So dismisses fears of potential bubbles forming in Latin American assets given the forecast inflows from international investors.

“We do expect that some clients will diversify away from asset classes that have done well, and the risk [of an asset bubble] always increases when an asset class appreciates,” he says. “But if you look at allocations into Latin America, they are still relatively low. The growth that we think will happen in terms of allocation to Latin America is still fairly low.”

So is also forecasting that Asia-Pacific will outpace the rest of the world in the growth of ultra-high-net-worth individuals (UHNWIs), or those with financial assets of at least $30 million. In Asia-Pacific there were 19,600 UHNWIs in 2009, or 0.6% of the region’s wealthy population, compared with 93,100 UHNWIs globally, or 0.9% of the wealthy population. So expects Asia to catch up quickly in this regard.

The growth rate for UHWNI population and wealth in Asia-Pacific stood at 36.7% and 42.6%, compared to 19.4% and 21.5% globally. But in Asia, UHNWIs accounted for only 24.5% of regional HNWI wealth, compared with 35.5% for the global figure.

In terms of individual markets, Chinese HNWIs had the highest allocation to equities in the region at 42% in 2009, followed by India at 32% and Malaysia at 30%. At the same time China had the lowest allocation to fixed income at 12%, narrowly ahead of Australia at 14% and Indonesia and Singapore at 16%.

Taiwan led the way in fixed income allocation at 26%, followed by Japan and India on 25% each.

China also had the second lowest allocation to cash, at 15%, behind only India at 13%. Indonesians had the highest percentage in cash, at 33%, followed by Japan at 29%.

Australia, meanwhile, held the highest allocation to real estate at 40%, followed by South Korea at 37% and Singapore at 34%.